UC Davis

This dissertation develops a framework to study the patterns of financial constraints in different sectors and development levels. Extensive literature links financial constraints to aggregate productivity outcomes. Finding patterns of the severity of financial constraints would allow us to provide an explanation for the patterns of misallocation and productivity across sectors at different levels of development.

Motivated by the rise of the service sector economy and the implications that this will have for developed and developing countries. In the first chapter of this dissertation (together with Narges Attaran) we present the patterns of misallocation in services and manufacturing at different levels of development. While we have some evidence that misallocation is higher in services than in manufacturing, these findings have been produced in the context of intra-country comparison. Is misallocation consistently higher in the service sector? Is there a pattern of the severity of misallocation in the service sector? We answer the later question by presenting a novel fact: misallocation in the service sector is relatively more severe at lower levels of development. To rationalize the previous fact, we build a model of industry dynamics, endogenous borrowing constraints, and financial structure. We use the model to qualitatively capture the new facts presented in this chapter and argue about the potential TFP losses implied by the patterns of premature deindustrialization.

In the second chapter of this dissertation (together with Narges Attaran) we ask what does the data tell us about the financing pattern of young firms. Using \textit{Orbis} data we document the financing patterns of young European firms. Specifically, we discuss leverage, trade credit and maturity matching patterns over the early life cycle of firms. By analyzing the financing patters, we aim to provide guidance for modeling choices when working with young firms.

In the last chapter of this dissertation, I take the lessons from chapter 2 and propose a model that allows to ask how severe are financial constraints over the early life cycle of firms. Inspired by the corporate finance tradition that infers from the capital structure decisions of a firm the presence of financial frictions, in this chapter I develop an endogenous borrowing constraints model that links capital structure dynamics to enforcement frictions. The paper makes three contributions. First, the model offers the first rationalization of the stylized facts of international corporate finance. Traditional models of endogenous borrowing constraints generate counterfactual predictions regarding long-term leverage across development levels. Second, the model provides a novel framework to analyze financial constraints linking (short and long) funding gaps to outcomes distortions. Third, it argues that short-term funding gaps are biased measures of the severity of financial constraints and proposes a methodology to measure them.

The key mechanism of the paper results from the novel interaction between the enforcement level of the economy, the capital/scale choice of firms at entry, and the corresponding sequence of endogenous borrowing constraints that firms will face. Enforcement frictions will directly and indirectly (through distortions in the initial scale choice) affect the borrowing constraint's severity. Moreover, the model uniquely pins down the firm's financial structure (i.e., the necessity of long- and short-term debt). This emerges from the interaction of transaction cost, the fact that short contracts are safe and long contracts are risky, and firms being unable to repay their total debt in the first period of operations. The main contribution of this paper is to show how, by looking at firms' capital structure over the early life cycle, one can infer the full effect of limited enforcement on the severity of financial constraints. The paper's central message is that while the direct effects of enforcement can be inferred using data from a single country, the indirect effects that operate through the scale choice require the usage of a benchmark country. In this sense, measuring the severity of financial constraints is fundamentally a cross-country exercise.